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Cramdown on Furniture and Other Personal Property Debts

June 10th, 2019 at 7:00 am

Cramdown lowers vehicle loan payments and the total paid on the loan. But you can also get similar benefits on other personal property debts. 


 

Our last 4 blog posts have been about Chapter 13 cramdown of vehicle loans. For most people filing a consumer bankruptcy case, their vehicle loan is their largest and most important personal property debt.

But cramdown can also apply to debts secured by personal property other than your vehicle. Some examples are furniture and appliance loans, secured credit cards, and pawnbroker loans.  Cramdown on such debts can reduce both monthly payments and the total you pay on the debt. Often both your immediate savings and the long-term savings are significant. If you’re behind on payments you’d likely not need to catch up.  

If the secured debt is large enough, or if keeping the collateral is important enough, the opportunity to cram down the debt may be reason enough to file under Chapter 13 “adjustment of debts” instead of Chapter 7 “straight bankruptcy.” Or if you have decided on Chapter 13 for other reasons, the savings on your non-vehicle personal property loan(s) will likely help you have a successful Chapter 13 case.

Cramdown Divides a Debt into the Secured and Unsecured Portions

Bankruptcy law divides an undersecured debt into secured and unsecured portions. See Section 506(a)(1) of the U.S. Bankruptcy Code. (“Undersecured” means that the collateral securing a debt is worth less than the amount of the debt it is securing.)

Chapter 13 cramdown allows you to create new payment terms based on the secured portion only. Besides the reduced amount of principal being paid, the payments usually stretch out over a longer period. The interest rate is often also reduced.  These all usually result in a reduction in the monthly payment.

Then you pay the remaining unsecured portion usually only to the extent that you can afford to, if at all. That generally reduces the amount you pay before you own the collateral free and clear at the end of your case.

For Example

Assume you bought bedroom and living room furniture a year ago for you and your kids. You had moved to a new job and thought you could easily afford the monthly payments. You financed the entire $5,000 price of the furniture, at 15% interest, and monthly payments of $200. The first payment was not due until 6 months later.

But now a year from the purchase, the income from your new job has not turned out to be as much as you’d expected. Plus some old income tax debts have caught up with you. So now you’re filing a Chapter 13 case.

What happens to the furniture debt? It’s an undersecured one, with the depreciated furniture now worth only $2,500 while the debt is still $4,500. (That high balance is because of the 6 months of no payments and then irregular payments the following 6 months.)

You’d pay the $2,500 secured portion of the debt over the 36 months of the Chapter 13 payment plan. The annual interest rate would be lowered to around 5%. The resulting monthly payment is only $75 per month.

The remaining $2,500 unsecured portion of the furniture loan would be lumped in with your other general unsecured debts. You’d pay it only to the extent that you had money left over during your payment plan after paying your other more important debts (such as your unpaid income taxes).

So here’s the end result. Without bankruptcy cramdown, you’d have to pay the $4,500 balance plus about $1,000 of interest, a total of about $5,500. With Chapter 13 cramdown, you’d pay $2,500, plus only about $200 of interest, resulting in a total of as little as $2,700. (This assumes paying nothing on the unsecured portion.)

Just as importantly, paying only $75 per month instead of $200 would ease up on your cash flow. That would give you crucial money each month for either necessary living expenses or high-priority debt—such as taxes). This could make possible for you to meet your Chapter 13 goals—such as paying off the taxes you must pay.

Cramdown Timing Condition on “Any Other Thing of Value”

There is one timing condition related to personal property debts secured by other than a “motor vehicle.” If you bought “any other thing of value,” cramdown is not available for 1 year after its purchase. Section 1325(a)(5) of the Bankruptcy Code, and the “hanging paragraph” referring to that subsection, found right below Section 1325(a)(9).  Cramdown is available after that 1-year period has passed.

 

An Example of Money Saved through Vehicle Loan Cramdown

June 3rd, 2019 at 7:00 am

Here’s an example of vehicle loan cramdown that shows how you can reduce your vehicle payments and be free and clear after paying less. 

 

Our last 3 blog posts have been about Chapter 13 cramdown of a vehicle loan. Cramdown can reduce your loan’s monthly payments, its interest rate, and the total you pay for your vehicle. Often you end up saving a lot both monthly and on the total paid. 

The last three blog posts introduced how cramdown works, how to qualify for it, and how you don’t have to catch up on late payments. But like anything, explaining a bunch of rules only goes so far. Showing how the rules actually get applied can be the best way to make sense of a complicated concept like cramdown. A good example is like a picture: it’s worth a thousand words.

So today, how does cramdown work in real life?

The Facts of Our Example

Let’s say you are a payment behind on your vehicle loan. You’re about to miss a second payment, and you’re feeling desperate. You have made making your vehicle payments a priority but you have other debts that are putting intense pressure on you. Your vehicle is absolutely essential in your life so you know you have to do something.  

You know that to keep your vehicle you have to either get rid of or greatly reduce your other debts. Those other debts are medical bills and unsecured credit cards, all together totaling $75,000. You’re considering either Chapter 7 to write off those other debts or Chapter 13 to greatly reduce those debts.

Assume you bought your vehicle 3 years ago, it’s worth $9,000, but you still owe $15,000 on it. The contractual monthly payments are $550. Your budget, allowing for reasonable amounts for your living expenses, shows that you can afford to pay a total of $350 per month on all of your debts, including the vehicle loan.

Chapter 7 Doesn’t Help Enough Here

You understand that a Chapter 7 case would most likely write off (“discharge”) your entire $75,000 of unsecured debts. But even after that you’d really struggle to pay the $550 monthly vehicle payments. Plus you’d almost for sure have to catch up quickly on the $1,100 in late payments (2 times $550).  

How Chapter 13 Cramdown Helps More

Cramdown essentially allows you to re-write your vehicle loan based on the fair market value of your vehicle.

Cramdown helps you more financially the more that you owe on your vehicle than it’s worth. Plus it’s usually available only if your loan is more than 910 days old—about 2 and half years. (See the unnumbered “hanging paragraph” right after Section 1325(a)(9) of the U.S. Bankruptcy Code.) You qualify in our example because you bought your vehicle 3 years ago. (See exceptions to the 910-day qualification rule in our second-to-last blog post.)

Cramdown would rewrite your vehicle loan based on the $9,000 your vehicle is worth. The term of cramdown payments lasts between 36 to 60 months. Your interest rate is often reduced as well, depending on your contract interest rate. Plus, you don’t have to catch up on any missed payment.

This is contrast to Chapter 7, where almost always you have to accept all the contractual terms of the loan if you want to keep your vehicle. That includes catching up very quickly on any missed payments.  

Paying Less through Cramdown

What would be your monthly payment to pay off the $9,000 value of your car?  (That’s the secured portion of the $15,000 total vehicle debt.) Assume a 36-month Chapter 13 payment plan—the usual minimum length. Amortizing $9,000 over 36 months at 5% interest yields a monthly payment of about $270.

We said earlier that you can afford to pay all your debts $350 per month. (That includes the vehicle loan.) So your monthly Chapter 13 plan payment would be $350.  That would cover all your debts.

$350 monthly payments times 36 months equals $12,600 total paid. The vehicle lender would receive $9,000 of that, plus about $700 of interest over the 36 months. The Chapter 13 trustee gets a percentage—let’s say 4% of the total, so $504. Add up those amounts and we’ve accounted for $10,204 of the $12,600 total you’re paying. This leaves $2,396 remaining.

Assume in this example that you paid your bankruptcy lawyer up front. Otherwise part of his or her fee would be paid out of that remaining $2,396. But here all of that $2,396 would go to your pool of general unsecured debts. That includes the $75,000 of medical and credit card debts, plus the $6,000 unsecured portion of the vehicle loan. (That’s the part of the $15,000 total not covered by the vehicle’s value–$15,000 minus $9,000 = $6,000.)  $75,000 + this $6,000 = $81,000 in general unsecured debts.

The $2,396 left over is spread out pro rata to the $81,000 in general unsecured debts. This means that these debts will receive about 3% of the amount due. The unsecured $6,000 portion of the vehicle loan would thus get only about $180 of it paid.

The Final Numbers

Through the Chapter 13 vehicle cramdown in this example, you would pay to your vehicle lender the $9,000 vehicle value, plus about $700 in interest, plus the above $180, a total of about $9,880. You would not have to catch up on the $1,100 in late payments. This is in contrast to paying the $15,000 loan balance, plus likely about $2,000 in interest, or about $17,000. That’s what you would have to do to keep the car outside bankruptcy or under Chapter 7.

Under Chapter 13 your monthly payments on the vehicle would be $270 instead of $550. Your monthly plan payment would be $350—which includes the $270 to your vehicle lender. After 36 months of paying $200 less than you would have paid on your vehicle alone ($350 vs. $550), you would own your vehicle free and clear and would nothing to any of your other creditors.

 

Creditor Harassment after Bankruptcy

May 31st, 2019 at 6:26 pm

TX bankruptcy attorneyMaking the decision to file for bankruptcy is not an easy one. For the most part, bankruptcy is entered as a last resort when no other options have worked to help you get out of debt. Once you enter into the bankruptcy process, your creditors — or the people you owe money to — are no longer permitted by law to continue to try to collect on your debt. This does not stop some creditors — some continue to try to collect on debts. More often than not, when a creditor contacts you after you have filed for bankruptcy, it is a simple mistake. In some situations, creditors may continue a second or third time to collect on your debt — this is when you may be able to take legal action against your creditor for illegal harassment.

The Automatic Stay

The moment you file your bankruptcy case, something called the automatic stay goes into effect. The automatic stay is a federal injunction that prohibits creditors, collection agencies and government entities from attempting to collect on most debts. The automatic stay prevents creditors from:

  • Calling you;
  • Sending you letters, texts or emails;
  • Seeking a judgment against you;
  • Foreclosing on your home;
  • Garnishing your wages; or
  • Repossessing your property.

When you file for bankruptcy, you are required to list all entities that you are indebted to. When you file for bankruptcy, the court clerk will send a notice of bankruptcy to all of your listed creditors within 24 to 48 hours. Once your creditors receive that notice, they are officially required to suspend collection activities.

What You Can Do

If you are still being harassed about your debts after you have filed for bankruptcy or your debts have been discharged, there are things you can and should do.

 

  • Inform your debt collector of the bankruptcy. In most cases, collection attempts are made before the creditor is aware that you filed for bankruptcy. Though the court clerk is required to send the notice of bankruptcy 24 to 48 hours after you file, the notice is typically sent through the mail, which can take up to 10 days in some cases. Before you take more drastic measures, inform the debt collector that you have filed for bankruptcy and ask them not to call you anymore.
  • Keep notes about collection attempts. If your creditor attempts to contact you in any way, try to keep notes about their collection efforts. If they call you, write down the time and date of the call, the representative’s name and contact information and what they say to you. If you receive letters in the mail, keep the letters. These records may be used as evidence in a lawsuit against your creditor if necessary.
  • Hire a bankruptcy attorney. In most cases, after you inform your creditor that you have filed for bankruptcy, they will not contact you again. If you have a creditor who will not stop harassing you about your debt, you may need to hire a bankruptcy lawyer. A lawyer who is experienced in bankruptcy law will be able to help you file a lawsuit against a creditor who will not stop collection activities.

Contact a New Braunfels, TX Bankruptcy Lawyer for Help With

According to the United States Bankruptcy Code, you have the right to take legal action against creditors who repeatedly attempt to collect on debts during the automatic stay or after your debts are discharged. If you are being harassed by creditors, the Law Offices of Chance M. McGhee are ready to help. Our knowledgeable Kerrville bankruptcy attorneys will make sure your rights are protected and will take legal action against your creditors, if necessary. To schedule a free consultation, call our office today at 210-342-3400.

 

Sources:

https://wallethub.com/edu/d/automatic-stay/25548/

https://www.thebalance.com/when-creditors-do-not-stop-calling-after-bankruptcy-4156787

https://www.consumerfinance.gov/ask-cfpb/can-a-debt-collector-try-to-collect-on-a-debt-that-was-discharged-in-bankruptcy-en-1425/

Cramdown Your Vehicle Loan if Behind on Payments

May 27th, 2019 at 7:00 am

Vehicle loan cramdown doesn’t just likely reduce your vehicle payments and the total you pay. You’d also not have to catch up on late payments.  

 

Our last two blog posts have been about lowering monthly vehicle loan payments through Chapter 13 cramdown. This also often reduces the total that you pay on the loan until your vehicle is free and clear. Cramdown often even reduces the interest rate you pay. So it usually saves you money both every month and long term.

If you’re behind on your payments there’s an even more immediate benefit. If you qualify for cramdown, you don’t have to catch up on any late payments. This frees up the money immediately for other urgent needs. This is a huge monetary benefit at a time when your cash is likely extremely tight.

On top of this financial benefit, you get the peace of mind that your vehicle won’t be repossessed. Vehicle lenders can be quick to repossess when you fall behind, especially if your payment history has been spotty. It’s great to prevent a repossession, and then not have to scramble to catch up on the missed payments.

Today we show how this works.

Qualifying for Vehicle Loan Cramdown

See our last blog post for an explanation about how to qualify for Chapter 13 vehicle loan cramdown. Basically, the loan has to be more than 910 days (about 2 and a half years) old at the time you file your Chapter 13 “adjustment of debts” case. And the value of your car or truck needs to be less than the amount you owe on it. The more your vehicle is worth less than you owe the more cramdown can help you.

(There are some exceptions to the 910-day rule. For example, if the vehicle was purchased for business use, or if the loan was not for the purchase of the vehicle, there’s no time limit. Again, see our last blog post for the details. Also, see the “hanging paragraph” following Section 506(a)(9) of the federal Bankruptcy Code.)

The Missed Payments Are Unsecured

So now assuming that your vehicle loan qualifies for cramdown, see our second-to-last blog post about how cramdown works. Basically, your Chapter 13 payment plan divides your loan debt into secured and unsecured portions. The secured portion is in the amount that your vehicle is worth. The unsecured portion of the debt is the rest of its balance.

For example, assume you owe $18,000 on a vehicle that is worth $12,000. The secured portion of the loan balance is $12,000 and the unsecured portion is the remaining $6,000.

Your bankruptcy lawyer essentially recalculates the monthly payments based on the $12,000 secured portion. Besides being based on this lower amount to be paid, the monthly payments are often stretched beyond the number of months left on the contract, and the interest rate is often reduced (depending on how high the contract interest rate is). All this usually results in a lower monthly payment, often significantly lower.

The reason you don’t have to catch up on your missed loan payment(s) is that that part of the debt is unsecured. Using the example above, assume your monthly payments are $400, and that you just fell behind on a second month. So you’re behind $800. (And there’s a big risk that the repo man is looking for your vehicle.)

That $800 you’re behind does not affect the value of the vehicle. It’s worth $12,000 whether or not you’re current on the loan or not. That $800 (or whatever amount you’re behind) is part of the unsecured portion of the loan balance. It’s part of the unsecured portion of the debt. It does not affect how much you’re going to be paying each month under the cramdown.

What Does Happen to the Unsecured Missed Payment(s)?

As part of the unsecured portion of the loan balance, it’s put into the pool of your “general unsecured” debts. You pay these in your Chapter 13 plan only to the extent you can during the life of the plan. Other kinds of debts—secured ones and special “priority” ones (like child support and recent income taxes)—get paid before general unsecured debts get paid anything. As a result you often don’t pay the unsecured portion of your vehicle loan much, and sometimes nothing.

When DO You Have to Pay on the Vehicle Loan?

To the extent the general unsecured debts—including the missed payments—get paid, this happens later in your case. Depending on the amount of your secured and priority debts, the unsecured debts often don’t get paid until the final year or even final months of your case.

However, you start paying the secured portion, with the new crammed-down amount—the first month of your plan payments. It’s usually part of the amount that you pay to the Chapter 13 trustee. It’s part of the single plan payment that covers all your debts, based on what you can afford to pay. It’s usually due a month after your bankruptcy lawyer files your proposed plan, and must be paid on time.

Summary

Vehicle loan cramdown doesn’t just save you money, immediately and long-term.  If you’re behind on the monthly payments, cramdown enables you to avoid catching up on those payments. For example, if your vehicle insurance lapsed you could use that money instead to pay to reinstate the insurance. Or, not having to catch up could give you the financial break you need to start paying your Chapter 13 plan payments after filing your case. There are many such circumstances where not having to catch up on missed payments would enable you to keep your vehicle.

 

Qualifying for a Vehicle Loan Cramdown

May 20th, 2019 at 7:00 am

To qualify for a Chapter 13 vehicle loan cramdown, mostly your loan must be at least two and a half years old. There are exceptions to this. 

 

Last week’s blog post was about lowering monthly vehicle loan payments through Chapter 13 cramdown. This also often reduces how much you end up paying on the loan, and often even reduces its interest rate. Cramdown usually saves you money both immediately and long term. And you end up owning your vehicle free and clear at the end of your Chapter 13 case.  

Today we get into how to qualify for cramdown.

Qualifying for Cramdown—Timing

You can only do a cramdown if your vehicle loan is more than 910 days old when you file your Chapter 13 case. 910 day is about two and a half years. If you entered into the vehicle loan less than 910 days earlier, you can’t do a cramdown. You can’t reduce the monthly payments or the total amount paid on the loan.

The Bankruptcy Code says that you can’t do a cramdown if “the debt was incurred within the 910-day [period] preceding the date of the filing of the [Chapter 13] petition.” See the “hanging paragraph” following Section 506(a)(9) of the U.S. Bankruptcy Code.

What’s the reason for this 910-day timing condition? It’s a benefit to vehicle lenders. New cars and trucks depreciate fast. You can’t buy a vehicle, have it depreciate quickly for a year or two, and then take advantage of the fact that the vehicle isn’t worth as much as you owe on it. You have to wait two and a half years before you can do this.

Qualifying for Cramdown—910-day Rule Doesn’t Apply

The 910-day rule applies only to vehicle loans that are for the purchase of the vehicle. Under the language of the Bankruptcy Code, the 910-day waiting period only applies when “the creditor has a purchase money security interest securing the debt.” See the same paragraph” following Section 506(a)(9) referred to above.

So a loan used to refinance a vehicle CAN be crammed down without waiting the 910 days. Also, if you borrowed money for some purpose and gave your vehicle as collateral for the loan, you can do a cramdown without waiting.  

This same 910-day waiting period also does not apply to vehicles purchased for business use. The Bankruptcy Code says the 910-day rule only applies if “the collateral for that debt consists of a motor vehicle… acquired for the personal use of the debtor.” See the same paragraph in the Bankruptcy we keep referring to.

There are open questions about both these “purchase money” and “personal use” conditions. For example, “personal use of the debtor” is not defined in the Bankruptcy Code. What about a pickup truck mostly used for operating a business but also used for personal transportation? Or how about a vehicle bought by a parent for the exclusive personal us of an adult child? Is that not the “personal use of the debtor” so that the 910-day rule does not apply?

The answers to these questions may turn on interpretations of the Code language by your local bankruptcy court. Talk with your bankruptcy lawyer about your own particular situation.

Qualifying for Cramdown—Undersecured Vehicle Loan

In case it’s not obvious, cramdown only works if your vehicle is worth less than the balance on your loan. You’re “cramming” the loan amount down to the secured amount of the debt. The more your loan is upside down the more cramdown can help.

If your vehicle is worth the same or more than you owe, there is no opportunity for cramdown. You might gain some other benefits on your vehicle loan from filing a Chapter 13 case, but no cramdown.

And how do you determine what your vehicle is worth for this purpose? For example, do you use “retail value” or “wholesale” or “trade-in” values? Should you use the Kelley or NADA Blue Book values or some other source? Again, these are questions for your bankruptcy lawyer, based on local law and practice.

Qualifying for Cramdown—Only in Chapter 13

Cramdown is not available under Chapter 7 “straight bankruptcy.” You must file a Chapter 13 “adjustment of debts” case. The payment and payoff terms of your cramdown are part of your 3-to-5-year Chapter 13 payment plan. In it you present the value of your vehicle, which indicates the secured part of your loan balance and the remaining unsecured part, and how much you intend to pay on each part.

(Cramdown is also available under Chapter 11 “reorganization,” which is generally used for corporate and other business bankruptcies. Section 1129(b)(2)(A). This blog post focuses instead on consumer oriented Chapter 13. But if you are operating a business or have unusually large debts, Chapter 11 may be an option to consider.)

 

The Role of a Bankruptcy Trustee

May 17th, 2019 at 2:45 pm

Texas bankruptcy attorneyComing to the decision that your best option is to file for bankruptcy is not easy. You may have taken weeks, if not months to realize that your best option is bankruptcy. The bankruptcy process can be confusing because of all of the legalities and people involved with the process. When you file for bankruptcy, the United States Trustee Program will assign you a bankruptcy trustee who will be responsible for overseeing your case. The trustee is one of the most important people in your case, so it is crucial that you understand the role of the trustee and the impact the trustee can have on your case.

What Is a Bankruptcy Trustee?

The role of a trustee was created to prevent the creditors and courts from having to be the ones responsible for collecting and distributing the property of those who file for bankruptcy. Trustees are independent contractors who are not employees of the bankruptcy court, but they must answer to the court and cannot take any kind of action until the court approves it. The trustee will evaluate and make recommendations pertaining to the demands of different debtors involved in the specific bankruptcy case they are assigned to.

Role of the Bankruptcy Trustee

The role of a trustee differs based on the type of case they are assigned to. Most bankruptcy cases will be assigned a trustee, except for Chapter 11 reorganization plans and Chapter 9 municipality cases.

Chapter 7 Bankruptcy Trustees

In Chapter 7 bankruptcy, your trustee is responsible for a couple of different things. First, it is the trustee’s job to make sure your bankruptcy claim is legitimate and not fraudulent. Your trustee will also be the person who determines whether or not you have any non-exempt assets. If you do, the trustee will also manage the sale of your assets and oversee the distribution of the proceeds to your creditors.

Chapter 13 Bankruptcy Trustees

The role of a trustee in a Chapter 13 bankruptcy is slightly different because the types of bankruptcies differ from each other. A Chapter 13 bankruptcy deals with a repayment plan, which your trustee will be responsible for overseeing. Your trustee will be your liaison between you and your debtors, making sure you have an affordable repayment plan, collecting your payments and distributing them to your debtors.

Contact a Texas Bankruptcy Attorney Today

One of the many aspects of a bankruptcy is the trustee, which is a crucial piece to the puzzle. Your trustee will make sure you have a reasonable bankruptcy plan, but sometimes you also need extra help. If you are thinking about filing for bankruptcy, you should talk with an experienced Kerrville, TX bankruptcy attorney. At the Law Offices of Chance M. McGhee, we will help you determine whether or not bankruptcy is appropriate for your situation. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.creditkarma.com/advice/i/bankruptcy-trustee/

https://www.thebalance.com/who-is-a-bankruptcy-trustee-316199

https://www.investopedia.com/terms/b/bankruptcy-trustee.asp

Keep Your Vehicle through Cramdown

May 13th, 2019 at 7:00 am

If you can’t afford to pay your vehicle payments even after writing off your other debts under Chapter 7, consider a Chapter 13 loan cramdown. 

 

The last two blog posts have been about keeping your vehicle in a Chapter 7 case. Two weeks ago was about the benefits of reaffirming the vehicle’s loan. Last week was about possible ways of keeping the vehicle by making the loan payments but not reaffirming. These all assumed that you would keep on making the full monthly payments in order to keep the vehicle.

But what if you can’t afford the full monthly payments? Are there any other options if, even after getting rid of your other debt, you can’t pay the vehicle payments?

The answer: you may be able to reduce the vehicle payments through Chapter 13 cramdown. In fact, you may be able to significantly reduce the payments. And cramdown may give you some other huge financial benefits.

Reducing Monthly Payments through Cramdown

Chapter 13 “adjustment of debts” is very different from Chapter 7 “straight bankruptcy.” It takes much longer but Chapter 13 comes with some significant advantages. This includes the possible cramdown of your vehicle loan.

Under Chapter 13 you and your bankruptcy lawyer come up with a court-approved payment plan. That plan just about always significantly reduces what you pay monthly towards your debts. And if you successfully complete the plan you usually pay significantly less overall towards your debts.

Similarly, under cramdown you can often reduce both your monthly payment and the total you pay on your vehicle loan.

How Does Cramdown Work?

Your Chapter 13 payment plan treats secured debts and unsecured debts very differently. In general, secured debts need to be paid in full if you want to keep whatever the debt is securing. Unsecured debts usually only need to be paid as much as there’s money available to pay them.

So what if a secured debt—such as a vehicle loan—is only partially secured? That happens if the vehicle is worth less than the balance owed on the loan. The secured part of the loan is the amount equal to the value of the vehicle. The unsecured part is the rest of the loan balance—the part that effectively has nothing securing it.

Here’s a simple example. Let’s say you’d been paying for 3 years on a vehicle loan, you now still owe $15,000 but the vehicle is worth only $9,000. The secured portion of that vehicle loan is $9,000 and the unsecured portion is $6,000.

Recalculating the Payment Amount

Cramdown re-writes your vehicle loan so that your monthly payment gets calculated on only the secured part of the loan. In our example, your monthly payment now pays down only the $9,000 secured debt instead of the full $15,000 balance. Since the secured amount is less than the full loan balance, the new monthly payments are usually less.

The monthly payment is also reduced when those payments are stretched out over a longer period. They can extend as long as your Chapter 13 payment plan lasts, which is usually 3 to 5 years.

In addition, cramdown sometimes lowers the vehicle loan’s interest rate. That helps if your contract interest rate is high.

Combining all this, cramdown reduces your monthly payment by reducing the total amount it is paying off (the secured part of the loan), sometimes stretching the payment term out over a longer period, and often reducing the interest rate.

As a result, it’s not unusual for monthly payments to be chopped in half, or even better. It all depends on the details of your vehicle loan and on your finances going forward.  

What Happens to the Unsecured Part?

In our example, what happens under Chapter 13 cramdown to the remaining $6,000 unsecured part of the vehicle loan?

It’s lumped in with and treated just like your other “general unsecured” debts. Most of the time a Chapter 13 payment plan pays these low-priority debts only as much as you can pay them, if anything. That is, you pay “general unsecured” debts only AFTER paying the “priority” and secured debts.

There are exceptions, but this usually means you pay the unsecured part of your vehicle loan only if and to the extent you have money left over after paying other debts during the course of your payment plan. At your case’s completion any remaining amount gets “discharged,” permanently written off, along with your other “general unsecured” debts.

Qualifying for Cramdown, Other Considerations

Next week we’ll get into timing and other considerations in qualifying for a Chapter 13 vehicle loan cramdown.

 

Keep Your Vehicle without Reaffirmation

May 6th, 2019 at 7:00 am

Can you keep your vehicle without reaffirming its loan? Can you make the payments without reaffirming?  What if you can’t afford the payments? 

 

Last week we discussed keeping your vehicle in Chapter 7 by entering into a reaffirmation agreement with your vehicle lender. Through this agreement you exclude your vehicle loan from the discharge of debts. In return you get to keep your vehicle. You also get an early start on rebuilding your credit by making payments on and eventually paying off this loan.

We ended last week with two unanswered questions:

  • Would you be able to keep your vehicle in a Chapter 7 case if you DIDN’T sign a reaffirmation agreement but just kept current on your payments and insurance?
  • Are there any other options if you couldn’t afford the vehicle payments even after discharging your other debts?

We cover the first question today, the second one next time.

Risks to Avoid If You Can

Think long and hard before entering into a reaffirmation agreement. If you sign the agreement you’re passing up on this one-time opportunity to get out from under the debt. Be sure you understand the risk that you might not be able to make the loan payments at some point. Then you’d have to surrender the vehicle. At that point you would likely be left owing the lender a “deficiency balance.” This is the amount remaining on your debt after applying the lender’s proceeds from selling your vehicle after repossession.  The “deficiency balance” you’d owe would likely be much more than you expect because of the costs the lender is allowed to add to the debt, and the relatively small amount it would likely get from auctioning off your vehicle.

A “Ride-Through” Option?

One possible way to avoid this risk of a deficiency balance debt is to make the payments without reaffirming the debt.

The idea is that your lender shouldn’t be able to repossess your vehicle if you’re complying with all your contractual obligations. This mostly includes being perfect on your monthly payments and keeping the vehicle insurance current.

And if you don’t sign a reaffirmation agreement you won’t be liable for any remaining debt on the loan. The vehicle loan debt would be discharged along with your other debts.

So you’re trying to keep the vehicle without the risk of owing a big balance if you ever have to surrender it.

“Ride-Through” Problems

There’s one huge problem with this attractive-sounding option. In most (if not all) of the country, a vehicle lender DOES have the right to repossess a vehicle once the Chapter 7 case is over if there’s no signed reaffirmation agreement. This is true even if the loan payments and the vehicle insurance are current.

So, most lenders insist on a reaffirmation agreement if you want to keep the vehicle. They have good reason to do so. They want you to pay off the entire loan. You’ll more likely do that if you have the risk of owing a deficiency balance hanging over you throughout the remaining life of the loan.  The lender doesn’t want to leave you with the option of surrendering the vehicle whenever you want without financial penalty.

Your Remaining Options

You may nevertheless have some options.

  • Some vehicle lenders may still allow you to just keep current without reaffirming, and keep the vehicle. These would more likely be smaller lenders. This may work especially with a vehicle that’s already worth less than what you owe. In this situation the lender may prefer getting your monthly payments instead of having to take a loss on the loan. This may be better on their books now and the lender has a good chance of getting more money in the long run. So ask your bankruptcy lawyer if your lender may be amenable to this.        
  • In some situations the bankruptcy court may not approve a reaffirmation agreement.                                                                                                                                                                    This can happen if your lawyer will (strategically or otherwise) not sign off on the agreement. This then triggers the court’s review and necessary approval (which is not needed if your lawyer signs off). The court would likely not approve the agreement if your budget shows that you can’t afford the loan payments. If the court doesn’t approve the agreement, you may be able to keep the vehicle by just keeping current on the payments (by scrimping on the rest of your expenses). This option is tricky and should only be done with the advice and close assistance of your lawyer.
  • Some lenders might let you adjust the contract terms in your reaffirmation agreement, such as by lowering the monthly payments. Since then you’ll more likely be able to make the payments, it’s less likely the vehicle will get repossessed. So reaffirming in this situation is less risky. Frankly, most vehicle lenders aren’t this flexible, but talk with your lawyer about whether yours might be.
  • Chapter 13 “cram down” could force your lender to accept lower monthly payments, and even money overall. This is an important option if you must keep your car and can’t afford to do so without lower payments. This is the topic of next week’s blog post.

 

Keep Your Vehicle by Reaffirming its Loan

April 29th, 2019 at 7:00 am

If you want to keep your vehicle and still pay on its loan, file a Chapter 7 case to write off other debts and reaffirm the vehicle loan.  

A Vehicle Loan is a Secured Debts

We started this series of blog posts on debts by introducing secured debts as follows:

Each of your debts is either secured by something you own or it is not. A secured debt is backed up by a lien, a legal interest of the creditor in some kind of property of yours. See Section 101(37) of the U.S. Bankruptcy Code.

Usually you know whether a debt is secured. For example, in the case of a vehicle loan the vehicle’s title states that your lender is the lienholder. That lien on the title makes the loan secured by the vehicle. That, together with the security agreement you signed, gives the lender certain rights over your vehicle.

Let’s assume that you have a vehicle that you are paying for through a vehicle loan. If you look at your vehicle’s title, your lender is listed as the lienholder on your vehicle. The loan documents include a security agreement that gives the lender the right to repossess the vehicle if you don’t make the loan payments.

Also let’s assume that you really want to keep your vehicle. One of the main reasons you are considering filing bankruptcy is to write off all or most of your other debts so you can afford to pay your vehicle loan.

Reaffirming the Vehicle Loan

Filing a Chapter 7 “straight bankruptcy” case could well accomplish this. It could permanently forgive (“discharge”) all or most of your other debts. That could free up enough of your monthly cash flow so you’d have money to pay your vehicle loan payments.

Talk with a bankruptcy lawyer to find out which of your own debts would be discharged. Bankruptcy discharges most debts, but there are quite a few exceptions. (See our last 10 blog posts about those exceptions.)  Your lawyer will help you put together your after–bankruptcy budget. From that you’ll see whether you’d be able to pay on your vehicle loan after discharging your other debts.

If so, filing a Chapter 7 case and signing a vehicle loan reaffirmation agreement may be your best option.

Reaffirmation Is a Voluntary Discharge Exception

A reaffirmation agreement excludes the vehicle loan from the discharge of debts Chapter 7 bankruptcy otherwise entitles you to. You enter into it voluntarily in return for getting to keep your vehicle.

It’s voluntary because you recognize that your lender has the right to take your vehicle if don’t make your payments. That doesn’t change when you file bankruptcy. The point of the reaffirmation agreement is to allow you to keep your vehicle.

Voluntarily Deciding Not to Reaffirm

You can file a bankruptcy case and choose NOT to reaffirm your vehicle loan. In a Chapter 7 case that would generally mean that you’d surrender the vehicle to your lender. The bankruptcy discharge would then virtually always write off any remaining debt you’d owe on the vehicle loan.

Think very seriously and open-mindedly about this option before you reaffirm the loan. Bankruptcy gives you a one-time opportunity to get out of the vehicle loan. Consider whether you would definitely be able to afford its monthly payments, insurance, maintenance and other costs. Find out what the vehicle is now worth compared to what you owe. Think creatively about other transportation options. Don’t just reaffirm the loan because you figure you have no other choice. Make it an informed choice, whichever way you choose.

The Risks of Reaffirming

A reaffirmation agreement excludes the vehicle loan from the bankruptcy discharge. So it returns to the lender all of the rights it had over you that it had before your bankruptcy.

That of course includes the right to repossess your vehicle if you don’t make payments on time. But likely also included is the right to repossess if you let the insurance lapse. Or the lender may impose its own insurance and charge you an exorbitant amount for it. The lender may even be quicker about force-placing insurance or repossessing after bankruptcy than before.

So do not enter into a reaffirmation agreement lightly. It would certainly be unfortunate for somebody to go through the efforts of a Chapter 7 case, get a fresh financial start, only to have a vehicle repossession and its resulting debt a year or two later.

Other Options?

Are there any other options if you couldn’t afford the vehicle payments even after discharging your other debts?

Also, would you be able to keep your vehicle in a Chapter 7 case if you DIDN’T sign a reaffirmation agreement but just kept current on your payments and insurance?

We’ll cover these practical questions in the next blog post or two.

In the meantime, reaffirmation agreements are covered by the Bankruptcy Code at Section 524(c).

 

What Not to Do Before Filing for a Texas Bankruptcy

April 26th, 2019 at 2:38 pm

Texas bankruptcy attorneyFor many people who have quite a bit of debt, bankruptcy is the best option. There are two types of bankruptcies that individuals can file for in the United States — Chapter 7 and Chapter 13 bankruptcies. A Chapter 7 bankruptcy is one that discharges most of your debt and leaves you with a blank slate so you can rebuild your finances. A Chapter 13 bankruptcy is basically a reorganization of your debts — you work with your debtors to come up with a repayment plan that works for you. In either of these scenarios, there are certain things that are big no-no’s. It is important that you avoid these common mistakes when filing for a Texas bankruptcy:

Lying or Withholding Information from Your Attorney

Though it may seem beneficial to lie or hide certain assets from your attorney, it is quite the opposite. It is against the law to attempt to hide assets or omit them from your list of assets that you submit to the bankruptcy court. Not only could your bankruptcy case be rejected, but you can also face criminal charges related to bankruptcy fraud.

Acquiring New Debt After You Have Started the Process

In a Chapter 7 bankruptcy, most if not all of your debts are discharged. It may be tempting to take your credit card and go on a shopping spree before you file for bankruptcy, but that is the last thing you should do. Incurring new debt within 90 days of filing for bankruptcy is highly frowned upon and will most likely not be dischargeable in your bankruptcy, meaning you will be responsible for repaying that debt.

Giving Money or Property to Your Friends or Family

Similar to lying about your assets, it is also not a good idea to try to give money or other property to your friends or family before you file for bankruptcy. This is also illegal and can put your bankruptcy case in jeopardy, along with possible criminal charges and repercussions.

Not Hiring a Skilled New Braunfels, TX Bankruptcy Lawyer

The bankruptcy process can be overwhelming for many people — there is a lot of paperwork that must be filed and there are many legalities that must be followed. At the Law Offices of Chance M. McGhee, we take the confusion out of bankruptcy and help you avoid making these costly mistakes. Let our knowledgeable Kerrville, TX bankruptcy attorneys guide you throughout the bankruptcy process and lead you on a path to financial wellbeing. Call our office today at 210-342-3400 to set up a free consultation.

 

Sources:

https://www.allbusiness.com/13-mistakes-avoid-filing-chapter-13-bankruptcy-12340-1.html

https://www.myhorizontoday.com/bankruptcy101/five-common-mistakes-debtors-make-when-filing-bankruptcy/

https://www.debt.org/blog/what-not-to-do-before-filing-bankruptcy/

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